The Beginning of the End of America’s Financial Empire: How The Death of Conservative Accounting and a Lack of Financial Honesty and Transparency are Destroying Confidence in our Capital Markets
Like the British financial empire immediately before it and many empires throughout history (Rome also comes to mind), America’s financial empire is crumbling from many places and on many different levels! 
What we have here people is a crime scene still in progress that there is not a proper solution to or at least not a solution currently being implemented.
In other words, very little is being done about it and a good argument can definitely be made that a cover up is taking place to keep this confidence game (shell game) going!
This problem is not only here in the US with our federal government and our companies, but other countries like Italy, Greece and many others are also cheating on their accounting! So are many US states and other local governments in fact! It’s all one big confidence game!
Not only is government regulation not doing anything to solve these problems of corporations lying using creating/aggressive accounting, but the government itself is ALSO using the same type of creative accounting to hide as much of the truth as it can!
Some of you know more about this than others, so my goal in writing this is to give all of you a general picture of how and when the destruction of our most important foundations began, give you some details into all of this that my more advanced readers might have possibly overlooked as well as give you some investing ideas and options for asset classes and types of stocks where you can protect yourself from ever investing in companies that have “financial irregularities” aka “fantasy accounting” in companies like Enron, Worldcom, Lehman Brothers, Bear Sterns, the current big US bank stocks and others.
Are you ready for today’s lesson on trying to sort through this accounting BS from both the public and private sectors?
First off, let me state that, for the record, based on my own independent research, I am of the opinion that both the U.S. Federal Government, the states and other municipalities AND many publicly traded corporations here in the US are using “creative” accounting or “financial engineering” and are cheating on their financial statements.
This means they are not using conservative accounting and taking charges (losses or writedowns) on assets that they should be. Charges result in losses and that means a drop in the stock price and most corporate executives have compensation packages somehow tied to the stock price. There is an incentive for them to cheat!
This type of “fantasy accounting” is used by financial “wizards” (we won’t call them criminals because they are innocent until proven guilty).
Let’s outline some ways a company can cheat. They can:
- Extremely overvalue the assets on balance sheets (Lehman got caught lying and extremely overvaluing the assets on its balance sheet and was shorted to death for doing this)
- Book profits that may or may not ever exist long into the future (watch the documentary about Enron called The Smartest Guys in the Room and you will know what I am talking about)
- Move toxic “assets” off of the balance sheets and into separate dummy corporations and tiny, controlled LLCs that the company still controls. (Enron also did this and the largest US banks were doing this until recently when Congress changed the law)
One of the ways you can protect yourself is by learning how to correctly read all 3 major Financial Statements a company releases Quarterly and Yearly (Balance Sheet, Income Statement and Statement of Cash Flows) as well as reading all the notes underneath the statements.
Some astute investors only like to read the notes because they believe that’s where all of the bad stuff is hidden by the company’s financial engineers. Having the ability to dissect those financial statements will help you out a lot as an investor!
This is a tremendous problem for ALL financial markets in the US because it undermines confidence in the markets and investing in the stocks of publicly traded companies as well as US Treasury debt when the US government is lying about its budget deficits, its unfunded liabilities, etc.
For those of you unaware, this is an important month for accounting rules changing. As many of you investors, traders and practicing CPAs know, this is the one year anniversary of the month when the FASB changed the accounting laws. Here’s another explanation of the rule changes the FASB made about one year ago and a few hard hitting articles from ZeroHedge and others on the subject if you want to go further in depth on what has transpired in the last year:
- Mark to Market: Time of Death 8:45AM
- Brutalizing the FASB’s Attempts at Piglipsticking
- Big Banks: “You Will Cancel FASB 166 So We Can Continue Pretending All Is Good… Or We Will Kill Lending Even More”
- FHLB Chairman Disgusted With FASB Accounting Alchemy, Quits
So, the question becomes what’s the best way to still invest in stocks and to protect yourself, your net worth and your investment portfolio from all of this bad accounting?
With very few exceptions, DIVIDENDS DON’T LIE!
Here’s a few links to videos and interviews explaining dividends, the whole concept about how “dividends don’t lie” and how a dividend is the best sign/indicator of the financial strength of a large company:
A Good Summary Video about Dividends and Dividend Investing
A company that is really profitable and NOT FAKING it through accounting gimmickry has lots of free cash flow. That’s extra free cash that they can either return to shareholders in the form of dividends or re-invest back into the company to pay for growth (funding growth projects organically or through acquisitions). The large companies that have lots of free cash flow often pay dividends and normally try and raise the amount of dividend they pay yearly. This is a good sign of financial strength.
If these companies weren’t as profitable as they say and didn’t have the free cash flow, they couldn’t afford to pay their shareholders a dividend because the company would need the cash to prevent itself from going out of business.
Because of this dividend litmus test, buying the bonds of strong dividend paying companies with a good dividend history is a good idea if you want to diversify out of stocks. Check the dividend record of a company before you buy the bonds. That’s a better indicator of the company’s financial strength in my humble opinion than an S&P or Moody’s credit rating on the company.
The Treasuries of more responsible countries, like Australia, which have already started raising interest rates way ahead of everyone else are a good investment outside of normal stocks and corporate bonds.
In conclusion, to protect yourself from bad accounting look for
- Provable earnings/profits in the form of free cash flow and payable dividends of companies with a track record for paying their dividend
- Corporate bonds from these same companies
- Treasury bills from more responsible countries who are RAISING interest rates substantially now while all of the irresponsible central bankers around the world are lowering them!
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